Chapter 11: The Cost Approach

Cost Approach - focused on objective value. Is applicable when property involves new improvements for which there are no comparable on the market.. 

5 Steps: 

1. Estimate the value of the site.
2. Estimate the replacement cost on the effective date of the appraisal.
3. Estimate depreciation suffered by the improvements.
4. Estimate total depreciated cost.
5. Estimate value of the property. 

Reproduction vs. Replacement cost - historically, the cost approach relied on reproduction cost (the cost to produce an exact replica). Now, appraisers favour replacement cost (cost of construction at current prices). Replacement cost calculations are less complex.

Step 1 - Estimate the Site Value

Comparative Sales Method - this method is based on the most recent data sales available on similar sites. 

Abstraction Method - separating the value of structure and other physical improvements from the total of the property to arrive at site value. This method is used when comparable sites cannot be found.

Land Residual Method - based on principal of surplus productivity. Sets value through the capitalization process.

Land Development Method - applied when comparative method can't be used due to lack of comparable. Method for specific properties.

 

Step 2 - Estimate Replacement Cost

Comparative Square Metre/Foot Method - calculation the known cost per sq.m of a new building similar to the subject, and then multiplying this unit cost by the # of sq.m in the subject structure. 

Cost Services Method - a method relies on dollar costs provided in a cost service manual.

Unit-in-Place Method - determining the unit cost of component sections of the structure installed or in place. Includes both material and labour. 

Quantity Survey Method - the most accurate and providable method, but time-consuming.

 

Depreciation - loss in value, measured as of the date of appraisal. Physical breakdown and functional loss of value. 

Physical Deterioration - curable / incurable.

Effective Age - the age of a structure based on its condition and utility. Various parts of structure may have different effective ages. 

 

Step 3 - Estimate Accrued Depreciation

Flat Depreciation Method - costing service companies provide flat annual depreciation rates.

Economic Age-Life Depreciation Method - effective age / economic life .

 

Superadequancy - overimprovement. 

Reproduction cost is more effective than the replacement cost.